Dollar on back foot over expectations a Fed rate cut is coming

TOKYO (Reuters) - The dollar was on the back foot on Thursday, trading near a one-week low versus the yen as falling Treasury yields fuelled expectations the U.S. Federal Reserve will cut interest rates this month for the first time in a decade.

Government bonds are in the middle of a global rally, which has pushed U.S. Treasury yields to the lowest in more than 2-1/2 years and sent European yields to record lows on increasing bets major central banks will cut interest rates to bolster the global economy.

Waning expectations for a quick resolution to the United States-China trade war also hurt sentiment about the dollar.

The focus now shifts to U.S. non-farm payrolls data due on Friday, which economists expect to have risen by 160,000 in June, compared with 75,000 in May.

Positive payroll data is unlikely to buoy the dollar as expectations for U.S. rate cuts are strong, given low inflation and the fallout from the tariffs the United States and China have imposed on each other’s goods.

“When U.S. yields are this low, you can’t expect people to pile in and buy the dollar,” said Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo.

“Sentiment is tilted toward testing the dollar’s downside. There are expectations for lower rates in Europe and Britain, so it may be easier for the dollar to move versus the yen.”

The dollar was little changed at 107.75 yen on Thursday, after touching a one-week low of 107.54 yen on Wednesday.

The greenback has fallen 3.5% versus the yen in the past three months amid growing signs the Fed will cut rates at its July 30-31 meeting.

Benchmark 10-year U.S. yields touched 1.939%, the lowest since November 2016, before recovering slightly. Lower yields reduce the appeal of holding the dollar.

The dollar index against a basket of six major currencies was slightly lower at 96.712.

Global forex trading likely will be subdued on Thursday as U.S. financial markets are closed for a public holiday.

U.S. President Donald Trump’s administration said on Wednesday it is scheduling a call with Chinese negotiators next week that would mark the resumption of talks between the two countries.

Expectations for a smooth resolution to a dispute have waned after Trump said any agreement would have to be tilted somewhat in favour of the United States.

The euro was little changed at $1.1287 on Thursday, near a two-week low of $1.1268.

The common currency has weakened since IMF Managing Director Christine Lagarde, perceived as a policy dove, was nominated as the next European Central Bank president.

Sterling traded hands at $1.2580 , mired near a two-week low of $1.2557 due to speculation the Bank of England will abandon its preference to raise interest rates and swing to the dovish camp as the trade war and uncertainty about Britain’s negotiations to leave the European Union impact the outlook.